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Sources of Transaction Costs in Vertical Exchanges
y Two non-integrated firms that are dependent on each other would result in bilateral
monopolies, opportunism, strategic misrepresentations, exploitation of bargaining power
y Every time there is a little change or uncertainty in the contract, negotiations are required
y If a product is a commodity and a market price is available and switching costs are low, more
likely NOT to be vertically integrated
Administrative Costs of Internalization
y Scale of production only makes sense to vertically integrate if you require a sufficient volume
of the product; otherwise, better to contract with a specialized manufacturer
y Developing distinct capabilities
y Management of strategically different businesses y
y Problem with incentives, lack of market prices, low-powered incentives
Competitive effects and monopolization (antagonizing competitors of the processes that you
Vertical integration can reduce flexibility to rapidly respond to uncertain demand and new
product development, where outsourcing can be key
Compounding risk failure at one stage can negatively impact othe...
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This note was uploaded on 01/25/2014 for the course ECON 365 taught by Professor G.mcintyre during the Fall '13 term at University of British Columbia.
- Fall '13